The news was mixed about the U.K., as Moody’s Investors Service retained its negative outlook on U.K. banks and luxury goods maker Burberry said it would disappoint on full-year earnings on slowing global sales. However, the pound rose on news that the U.K.’s trade deficit fell in July, implying that Britain may be emerging from recession.
Bloomberg reported Tuesday that while Moody’s declined late Monday to change its negative outlook on the country’s banks, citing the recession, possible additional loan writedowns and higher regulatory costs, and Burberry dragged other luxury stocks down with it on its gloomy news, all the news out of Britain was not bad. In early trading the pound reached its highest level in nearly four months on news that the country’s trade deficit had decreased.
In a statement, Elisabeth Rudman, a Moody’s senior vice president said, “The continued negative outlook for the U.K. banking sector is driven by the U.K.’s uncertain economic prospects, pressure on profitability and downside risk for asset quality.”
The ratings agency also cited in its statement that profitability stood to be cut by tighter consumer protection in the wake of British banks’ misselling of loan insurance, Basel III capital rules and proposals to raise firewalls around retail banks.
Burberry, down by as much as 20% at one point in early trading, revealed in a statement that, among stores open at least a year, sales were unchanged in the 10 weeks ending Sept. 8, with a “deceleration in recent weeks.” Accounting for currency shifts, retail sales were up 6% after a first quarter in which sales had increased 14%.
“We started the quarter at low- to mid-single digits and we’ve ended up flat,” Chief Financial Officer Stacey Cartwright said in the report. “That says that the last couple of weeks have turned negative.” She called the slowdown “broad-based in all of the regions.”
Citing talks with other luxury goods makers, Cartwright also said, “We know we are not alone in terms of what we’ve seen in the last couple of weeks. Traffic is down.” Among factors affecting sales, she added, were such things as the coming changeover in leaders in China, a factor also cited by Ermenegildo Zegna, chief executive officer of the namesake Italian luxury-goods maker this week, and a slowdown in gift-giving.
Also a factor was Burberry’s elimination of some entry-level products as it begins repositioning itself higher on the consumer scale. “The traveling consumer out of Asia, out of China in particular, may not be as prevalent as they were in terms of some of the entry-price products, the aspirational luxury products,” Cartwright said in the report. “That’s potentially hitting Europe these last few weeks.”
The good news was the falling of the trade deficit in July. The gap narrowed to 7.2 billion pounds ($11.5 billion) from June’s 10.1 billion pounds, with exports rising 9.3%; that’s the biggest increase since January 2003. Imports dropped by 2.1%. The news drove the pound higher against the dollar.